The Mispricing Return Premium

The Mispricing Return Premium We show that, when stock prices are subject to stochastic mispricing errors, expected rates of return may depend not only on the fundamental risk that is captured by a standard asset pricing model, but also on the type and degree of asset mispricing, even when the mispricing is zero on average. Empirically, the mispricing induced return premium, either estimated using a Kalman filter or proxied by the volatility and variance ratio of residual returns, is shown to be significantly associated with realized risk-adjusted returns. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

The Mispricing Return Premium

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Publisher
Oxford University Press
Copyright
© The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.
ISSN
0893-9454
eISSN
1465-7368
D.O.I.
10.1093/rfs/hhq064
Publisher site
See Article on Publisher Site

Abstract

We show that, when stock prices are subject to stochastic mispricing errors, expected rates of return may depend not only on the fundamental risk that is captured by a standard asset pricing model, but also on the type and degree of asset mispricing, even when the mispricing is zero on average. Empirically, the mispricing induced return premium, either estimated using a Kalman filter or proxied by the volatility and variance ratio of residual returns, is shown to be significantly associated with realized risk-adjusted returns.

Journal

The Review of Financial StudiesOxford University Press

Published: Sep 17, 2010

Keywords: JEL G10 G12

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